UPDATE: Congress launched an investigation into the planned rate hike. Please see this report for details.

Editor's note: This report has been updated and includes detailed responses from National Nurses United and California Insurance Commissioner Steve Poizner.

The Obama administration is demanding that California’s largest for-profit health insurer, Anthem Blue Cross, justify a planned 39 percent rate increase for some of its 800,000 customers even though the firm’s parent company saw its profits soar last year.

"These extraordinary increases are up to 15 times faster than inflation and threaten to make health care unaffordable for hundreds of thousands of Californians, many of whom are already struggling to make ends meet in a difficult economy," wrote Health and Human Services Secretary Kathleen Sebelius in a letter she faxed Monday to Anthem Blue Cross President Leslie Margolin. "Your company's strong financial position makes these rate increases even more difficult to understand. As you know, your parent company, WellPoint Incorporated, has seen its profits soar, earning $2.7 billion in the last quarter of 2009 alone."

Sebelius added: "I believe Anthem Blue Cross has a responsibility to provide a detailed justification for these rate increases to the public. Additionally, you should make public information on the percent of your individual market premiums that is used for medical care versus the percent that is used for administrative costs.

"Policy holders in the individual market deserve to know if their premium increases would be invested in better medical care or insurance company overhead costs like salaries, profits, and advertising. I am aware that the State of California is investigating this matter, and urge Anthem Blue Cross to cooperate fully. In the meantime, I will be closely monitoring the situation."

WellPoint's profit for all of 2009 was $4.7 billion, nearly twice as much as the company earned the year before. Since 2004, the company has generated $16.7 billion in profits. The corporation's top five executives received more than $20 million in compensation in 2008.

In a statement issued late Monday, Anthem Blue Cross said:

Anthem Blue Cross in California has received the letter from Secretary Sebelius. We will reply to her promptly. It is important to note that individual medical insurance premiums do not reflect an individual member's personal claims experience. Therefore, as medical costs increase across our member population, premium increases to the entire membership pool result. Unfortunately, in the weak economy many people who do not have health conditions are foregoing buying insurance. This leaves fewer people, often with significantly greater medical needs, in the insured pool. We regret the impact this has on our members. It highlights, why we need sustainable health care reform to manage the steadily rising costs of hospitals, drugs and doctors . As such, it is important to go back to the beginning and get health care reform done right. At the same time, we are engaging with a broad range of key stakeholders across California to discuss the state's individual insurance market and share ideas on how we can collectively partner on meaningful change.

Last week, the Los Angeles Times reported that Anthem Blue Cross started "telling many of its approximately 800,000 customers who buy individual coverage -- people not covered by group rates -- that its prices will go up March 1 and may be adjusted ‘more frequently’ than its typical yearly increases."

The company declined to disclose how many of it’s customers will be affected by the rate increase.

California Insurance Commissioner Steve Poizner, responded to the Los Angeles Times report by announcing that he would hire an "outside actuary" to determine if the rate hikes were excessive and if Anthem Blue Cross was spending 70 cents of every dollar on premium medical care as required by state law.

"If we find that their rates are excessive, I will use the full power of my office to bring these rates down," Poizner said.

"At my direction, the Department is retaining an independent actuary to analyze Anthem's proposed rate increases," Poizner said in a letter he sent Monday to Angela F. Braly, president and chief executive of Anthem's parent company, WellPoint, Inc., and Larry C. Glasscock, WellPoint's chairman.

"As a public benefit and to ensure that policyholders are not forced into financial hardship as a result of Anthem's proposed rate increases, I am asking that Anthem agree to postpone those rate increases until the Department's independent actuary completes his review," he added.

Poizner asked Braly and Glasscock to respond to his request by February 15. A spokesperson for WellPoint was unvailable for immediate comment.

The San Francisco Chronicle reported that unlike home and automobile insurers, "California insurers can legally raise rates for policyholders as much as and whenever they want. Regulators technically oversee the increases, but they have no power to control rates."

The Chronicle added:

The most recent effort to require state regulators to approve health insurance rate increases, a bill by Assemblyman Dave Jones, D-Sacramento, failed to pass the Assembly Health Committee in April.

In an interview on Sunday with CBS News anchor Katie Couric, President Obama said the rate increase underscores the urgency of passing a health care reform bill.

"That's a portrait of the future if we don't do something now," Obama said. "It's going to keep on beating down families, small businesses, large businesses; it's going to be a huge drain on the economy."

But the bill in its current form, which Obama described as "pretty centrist" during an appearance two weeks ago at the House Republican Conference in Baltimore, does not include a government-run plan to compete with private insurers such as Anthem Blue Cross.

Single-Payer Legislation

Recognizing the shortfall in the national plan, the California Senate two weeks ago passed a measure along party lines to create a $200 billion state-run, single-payer health care system.

The legislation, which was sent to the state Assembly for consideration, calls for the creation of the California Health System, which would be financed by using a combination of state and federal funds that California already earmarks for health care along with a payroll tax, the amount of which would be decided later.

The Medicare-for-all system would be extended to all California residents and individuals would have the opportunity to purchase private insurance to cover specific types of services not included in the government-run plan.

The bill, sponsored by Sen. Mark Leno (D-San Francisco), closely mirrors what Rep. Dennis Kucinich (D-Ohio) had envisioned when he introduced an amendment last summer that would have allowed individual states to create a single-payer system.

Kucinich’s amendment, however, was quietly stripped from the House version of a health care bill on orders from the White House after the legislation was unveiled last winter.

California Gov. Arnold Schwarzenegger said he will veto the bill if it reaches his desk, just as he has done with two other similar single-payer initiatives.

"Any elected official who thinks it's a good idea to strap the state with tens of billions of dollars from a government-run health care system is clearly not in touch with what voters need and deserve," Arrezola said.

But Leno noted that the plan "creates no new spending, and in fact, studies show that the state would save $8 billion in the first year under this single-payer health care plan."

National Nurses United (NNU), the nation’s largest union representing registered nurses, blasted the rate increase while urging lawmakers to support the Leno’s legislation.

"Anthem's disgraceful behavior may be particularly offensive, but it is not out of character for an industry engages systemically in price gouging and denial of care," said NNU co-president Deborah Burger, a registered nurse. "Condemnation is well deserved, but not enough. We need stronger medicine to cure what ails our healthcare system by removing the ability of insurance companies to indiscriminately price people out of access to care, and routinely deny claims they don't want to pay.

"The best way to achieve that goal would be expanding Medicare to cover everyone, which would retain our private delivery system, more effectively control healthcare costs, guarantee choice and access to care for everyone, and put patients, their families, and their doctors in charge of their care, not insurance bureaucrats."

NNU noted that its own independent research found that Anthem Blue Cross was one of six major California insurance companies that denied more than one-fifth of all insurance claims.

"For the first nine months of 2009, Anthem’s denial rate was 27 percent," NNU said in a statement Tuesday. "One such patient is Kim Kutcher of Dana Point, California. In 2008, six days before Kutcher was scheduled to have special back surgery, Anthem Blue Cross denied authorization for the procedure as 'investigational' even though the lumbar artificial disc she was to receive had FDA approval. At the time of denial, which she calls 'insurance hell,' Kutcher had 'already gone through pre-op testing, donated a unit of blood, had appointments with four physicians.' Kutcher paid $60,000 out of pocket for the operation and is still fighting Blue Cross."